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What is a good % return (3 yr pay back) on a 25k early stage investment for seed round participants?

Early stage pharma start up with 2 products at launch. Will see profit in year 2 and be able to pay back initial investment of $25,000 plus "Interest" at year three.

What is an attractive ROI for this type of investment ?

My model was payback at year 3 with 12.68% interest (in one payment) and offer 1 % of common shares. 4 year profit EBITA is forecasted at $7 million.

Would love to hear input and attractive models .....?

11 Replies

Bob Graham
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Bob Graham Entrepreneur
Engineering and Software
I'm not an investor but just curious more than anything... How do you know it will see profit in year 2 and $7MM forecasted? Are there existing sales?

This strikes me as a non-standard arrangement. Im mostly just curious and that's why Im posting here. I am by no means an expert.

It seems like you'd want a lot more than 12.68% interest on a high risk investment like a startup.

I know most angels need to fund 10-20 startups knowing all but 1 or 2 will fail, so it seems if they have to fund say 20 at $25K, then you should be able to show them you can make them at least $500K in 2 to 3 years. If you do $7MM, then I guess 7% equity or so seems fair based on math. Maybe this isn't an angel though?

Maybe I have this wrong, are you hoping to debt finance this instead of equity finance? If so, why not just go to a bank? Interest rates are so low.

Like I said, I am curious because I haven't heard of something like this before.
Annette Tonti
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Annette Tonti Advisor
Founder, President at The Start Exchange
Curious what happens at term if you cannot pay back the $25K + interest? Is the interest compounded annually? Will you be raising more money between now and the 3 years when the term is up?
Irwin Stein
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1
Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
If you can turn $25k into $7 million in 4 years you should be willing to pay a lot more for your money. I have a standing offer to anyone who wants to invest $50-$100k and I will double your money in 36 months. I have a simple, straightforward product with an easily reachable market. Mine has minimal CGS. You are going to launch two pharma products for $25k. I am very skeptical.
Howard Glase
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Howard Glase Entrepreneur
Managing Partner
Well --- I failed in the details. We have the self financed the two in license products to registration. I have a target seed round raise of $350k ( @ $25 k per person or multiples). Equity for final market approval --- once products are on market, we will raise $1 million institutional funds to build out further.

4 sales forecasted at $17 million, net profit at $6m.

I learning that a interest rate of 20 to 25 % is more inline on the money.

thx's Bob for your insights, Annette - yes we will have revenue and will raise more funds, Irwin ---apologies on the lack of details and being skeptical is a great foundation for due diligence....I have allot of interested investors, not seeking investors ---just good advice for fair ROI
Manish Koshal
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Manish Koshal Entrepreneur
Prop. of Second International
I have an idea for you. Manufacturing pharmaceuticals is very cost effective, in India. I could handle it for you and export to where you require. Let us work on this one, seriously. -- Manish Koshal, Second International, B-5/4483, Vasant Kunj, New Delhi-110070, India. Tele No.: +91 11 26122668 Fax No.: +91 11 26898692 Mobile #: +91 [removed to protect privacy] E. Mail: [removed to protect privacy] Skype: manish.koshal
Howard Glase
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Howard Glase Entrepreneur
Managing Partner
Yes India/China are viable sources; but for in licensing a product a FDA or NICE Drug Dossier and approved manufacturing facility with no infractions provides allot of confidence.

Thanks, hg
Bob Graham
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Bob Graham Entrepreneur
Engineering and Software
Can you go get a pre-sale for one product?
Forecasted sales almost never come to fruition.
Get any pre-sale and you've got something.

Or, why not raise a standard angel round on the deal? Sell the vision. I don't think angels will care about your forecast at all. They'll just care about your team, background and potential for the company (IE can it make $50MM+ and are you the guy to do it).

I'd stay away from loans with a startup unless you have the sales to pay off the interest and a very real roadmap of how to get more money.

Im not an expert but I feel you are placing too much faith in the forecasts.
Who cares about the forecasts anyways, go sell the vision :)
Ian Shearer
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Ian Shearer Advisor
Executive Chairman at Parakeetplay
I agree with Bob. It makes no sense to me to be thinking of a Loan when you say that you will have to raise equity later. You should now just raise Equity. A Professional Investor will make his own judgement on what the valuation should be.
For what its worth, in my part of the world Seed Rounds are generally done at a pre-money valuation of between 1m and 5m depending on how proven the product is.
Also as another contributor has suggested...your projections do not drive your valuation. To a professional investor they are really only relevant on two counts 1. To show your ambition and 2. To show your ability to plan and project.

Manish Koshal
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Manish Koshal Entrepreneur
Prop. of Second International
We would get all approvals for the manufacturing facility, so, you don't have to worry about it.
Mike Lingle
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0
Mike Lingle Advisor
Entrepreneur, I help startups start up
There's a reason that entrepreneurs typically raise money as equity or a convertible note (and sometimes a SAFE): everyone knows the rules. My biggest fails as a CEO have been when I tried to make up my own shortcuts. And I agree that the projections usually turn out to be wrong.

I strongly suggest raising money using the standard playbook.

Have you talked this through with a good lawyer?
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